Important SEP IRA Contribution & Rules

Simplified Employee Pension Individual Retirement Account, or the SEP IRA is a retirement plan that helps people running their own businesses and those who are self employed to save for retirement. The SEP IRA is something that can support large investments to ensure that the contributions made towards this account are maximized.

There are some SEP IRA rules that need to be followed too. IRS Pub 560 is the document that you need to refer to understand each and every rule. To have a rough idea about these rules, read on.

Plan Establishment

The time when this account can be established is when an employer’s tax returns are due. If an extension is filed, the deadline for IRA contribution is also extended.

Eligibility Rules

For an employee to be eligible for the SEP IRA retirement fund, he or she must be 21 years old, has received at least $500 in salary a year, should have rendered at least three years of service to the company. Employees without an established IRA (Individual Retirement Account) account cannot take advantage of the SEP IRA fund. This is where their employer would deposit their fund. 

Rules on Withdrawal and Distribution

Qualified withdrawals are those made at the age of 59 years and 6 months. This means that their withdrawals would be tax-free, similar to the traditional IRA. Withdrawals made prior to this age will incur a 10% tax deduction. 

Medical Expense and Insurance

Withdrawals made for the payment of medical expenses are considered qualified as well even if the person is not yet 59 1/2 years old, provided he/she has a minimum of 7.5% of the total adjusted gross income or the AGI for the year of the SEP IRA distribution. This service can be availed for the subscriber's dependents as well.

Purchase of Home

Within 120 days of the acquisition of your SEP IRA distribution amount, the government completely supports you to utilize some of the distributions towards a purchase for your home. However, the maximum amount that can be distributed from the SEP IRA to a home purchase is $10,000, if you are single and $20,000 if you are married. These distributions can also be utilized for Higher Education Expenses as well.

Beneficiary Distribution

This rule is for those who become disabled before the age of 59 years and 6 months. The SEP IRA distributions can be taken in such cases, without getting any penalties against it.

Required Minimum Distribution (RMD) Rules

In order to make sure that the distributions do not accumulate over time, this rule forces the administrators of SEP IRA accounts to start taking money before the age of 70 years and 6 months. This is also called the required minimum distribution age.

There are still a lot to know about the SEP IRA retirement fund. If you are self-employed and wish to set up one, talk to a CPA before doing so or visit www.sepirahq.com.